Venture Capital Definition Pros Cons and More

Venture Capital: Definition, Pros, Cons and More

Venture capital (VC) is a source of financing a start-up in exchange for equity. Setting up a start-up is quite a difficult task as it involves the investment of a lot of funds, and the profitable state is far from the horizon.

Most of the time, you take out a Small business loan to take it off the ground, but it might not be sufficient to fund your business, especially if your project is quite significant. It is why start-ups turn to venture capital when it comes to financing.

Venture capital funding is a source of inviting big companies to invest in start-ups that need money. Such kind of investment aims to help your company grow and sustain.

When any company contributes money to your business as venture capital, you do not need to return it as they get ownership in your business, and you will pay a proportion of return.

There is always a risk of in investing a start-up. Hence you should have an appropriate business plan to convince investors that our business will continue to grow. Otherwise, they will exit.

When Should You Seek VC Funding?

VC financing has become more flexible than it used to be. You can seek funds at any stage of your start-up. Some require it at an early stage, but some seek funding during the growth stage to keep the chances of denial as minimum as possible.

VC firms get equities, and hence they participate in the meeting of the board of directors. While VC funding can bolster the growth of your business, it can also take away control over your business.  You will feel more pressure to deliver the return to your investors.

If your business is going places, investors may come to your door without being invited with an investment proposal. You will have a chance to get the right amount of investment in exchange for lower equity.

Advantages of venture capital

Here are some pros:

  • You can leverage networks

One of the most significant benefits of seeking VC funding is you can leverage the networks of investors. Such systems can help you grow faster. You will easily approach your clients interested in buying your product or service.

  • Your business will expand

If you are looking forward to expanding your business, VC funding is a good source. As long as you do not need huge funds, you can borrow money from However, this will require you to pay back the money along with interest. Business loans are more expensive than regular loans.

If you raise funds from investors, you do not need to put collateral, nor do you arrange a guarantor. Investors will be ready to take on the risk if they believe that your company is a shoo-in.

  • You will get expertise

Venture capitalists have a broad knowledge of doing business, and hence they have you some ways to improve your revenues. If your profits hike up, their returns will also go up. They can help you build strategies by providing resources.

Disadvantages of venture capital

Here are the cons:

  • It is not suitable for all businesses

Venture capitalists invest in your business intending to earn a capital gain, and hence they are more likely to exist within two to three years. VC financing cannot be a good option if your business projects are going to take a lot of time to provide liquidity.

  • It is a time-consuming process

You will have to make a detailed business plan to convince a venture capitalist to invest in your business. After several one-on-one meetings, the investor may go ahead with funding. Both parties have to agree upon the amount of return. Cutting a long story short, it is a lengthy process.

Private equity and venture capital are not synonymous

They may sound similar, but they are not. Private equity is a type of investment made in already established private companies to get complete ownership. Private equity firms buy companies that are running down to take hold of operations to increase revenues.

However, venture capital is the amount invested in start-ups and small businesses. Venture capitalists may be well-off individuals, banks and other financial institutions. Unlike private equity, VC allows you to get technical and managerial support. Further, it does not let investors gain complete control over the business.

VC is the best way to fund your start-up, but you need to understand whether your business meets the criteria. Take stock of all the pros and cons before taking the plunge.


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Written by Jasmine Watson

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